GENERAL AUDIT PROCEDURES AND DOCUMENTATION

1. When does the audit process begin? The audit process commences with
the issuance of a Letter of Authority to a taxpayer who has been selected for
audit.

2. What is a Letter of Authority? The Letter of Authority is an official

document that empowers a Revenue Officer to examine and scrutinize a
Taxpayer’s books of accounts and other accounting records, in order to
determine the Taxpayer’s correct internal revenue tax liabilities.

3. Who issues the Letter of Authority? Letter of Authority, for

audit/investigation of taxpayers under the jurisdiction of National Office,
shall be issued and approved by the Commissioner of Internal Revenue,
while, for taxpayers under the jurisdiction of Regional Offices, it shall be
issued by the Regional Director.

4. When must a Letter of Authority be served? A Letter of Authority must be

served to the concerned Taxpayer within thirty (30) days from its date of
issuance, otherwise, it shall become null and void. The Taxpayer shall then
have the right to refuse the service of this LA, unless the LA is revalidated.

5. How often can a Letter of Authority be revalidated? A Letter of Authority

is revalidated through the issuance of a new LA. However, a Letter of
Authority can be revalidated—

Only once, for LAs issued in the Revenue Regional Offices or the Revenue
District Offices; or

Twice, in the case of LAs issued by the National Office.

Any suspended LA(s) must be attached to the new LA issued (RMO 38-88).

6. How much time does a Revenue Officer have to conduct an audit? A

Revenue Officer is allowed only one hundred twenty (120) days from the
date of receipt of a Letter of Authority by the Taxpayer to conduct the audit
and submit the required report of investigation. If the Revenue Officer is
unable to submit his final report of investigation within the 120-day period,
he must then submit a Progress Report to his Head of Office, and surrender
the Letter of Authority for revalidation.

7. How is a particular taxpayer selected for audit? Officers of the Bureau

(Revenue District Officers, Chief, Large Taxpayer Assessment Division,
Chief, Excise Taxpayer Operations Division, Chief, Policy Cases and Tax
Fraud Division) responsible for the conduct of audit/investigation shall
prepare a list of all taxpayer who fall within the selection criteria prescribed
in a Revenue Memorandum Order issued by the CIR to establish guidelines
for the audit program of a particular year. The list of taxpayers shall then be
submitted to their respective Assistant Commissioner for pre-approval and to
the Commissioner of Internal Revenue for final approval. The list submitted
by RDO shall be pre-approved by the Regional Director and finally approved
by Assistant Commissioner, Assessment Service (RMOs 64-99, 67-99, 18-
2000 and 19-2000).

8. How many times can a taxpayer be subjected to examination and

inspection for the same taxable year? A taxpayer’s books of accounts shall be
subjected to examination and inspection only once for a taxable year, except
in the following cases:

When the Commissioner determines that fraud, irregularities, or mistakes

were committed by Taxpayer;

When the Taxpayer himself requests a re-investigation or re-examination of

his books of accounts;

When there is a need to verify the Taxpayer’s compliance with withholding

and other internal revenue taxes as prescribed in a Revenue Memorandum
Order issued by the Commissioner of Internal Revenue.

When the Taxpayer’s capital gains tax liabilities must be verified; and

When the Commissioner chooses to exercise his power to obtain information

relative to the examination of other Taxpayers (Secs. 5 and 235, NIRC).

9. What are some of the powers of the Commissioner relative to the audit
process? In addition to the authority of the Commissioner to examine and
inspect the books of accounts of a Taxpayer who is being audited, the
Commissioner may also:

Obtain data and information from private parties other than the Taxpayer
himself (Sec.5, NIRC); and

Conduct inventory and surveillance, and prescribe presumptive gross sales

and receipts (Sec. 6, NIRC).

10. What is a Notice for Informal Conference ?A Notice for Informal

Conference is a written notice informing a Taxpayer that the findings of the
audit conducted on his books of accounts and accounting records indicate
that additional taxes or deficiency assessments have to be paid.
If, after the culmination of an audit, a Revenue Officer recommends the
imposition of deficiency assessments, this recommendation is communicated
by the Bureau to the Taxpayer concerned during an informal conference
called for this purpose. The Taxpayer shall then have fifteen (15) days from
the date of his receipt of the Notice for Informal Conference to explain his
side.

11. Within what time period must an assessment be made? An assessment

must be made within three (3) years from the last day prescribed by law for
the filing of the tax return for the tax that is being subjected to assessment or
from the day the return was filed if filed late. However, in cases involving tax
fraud, the Bureau has ten (10) years from the date of discovery of such fraud
within which to make the assessment.
Any assessments issued after the applicable period are deemed to have
prescribed, and can no longer be collected from the Taxpayer, unless the
Taxpayer has previously executed a Waiver of Statute of Limitations.

12. What is "Jeopardy Assessment"? A Jeopardy Assessment is a tax

assessment made by an authorized Revenue Officer without the benefit of
complete or partial audit, in light of the RO’s belief that the assessment and
collection of a deficiency tax will be jeopardized by delay caused by the
Taxpayer’s failure to:

Comply with audit and investigation requirements to present his books of

accounts and/or pertinent records, or

Substantiate all or any of the deductions, exemptions or credits claimed in his

return.

13. What is a Pre-Assessment Notice (PAN)? The Pre-Assessment Notice is

a communication issued by the Regional Assessment Division, or any other
concerned BIR Office, informing a Taxpayer who has been audited of the
findings of the Revenue Officer, following the review of these findings.

If the Taxpayer disagrees with the findings stated in the PAN, he shall then
have fifteen (15) days from his receipt of the PAN to file a written reply
contesting the proposed assessment.

14. Under what instances is PAN no longer required? A Preliminary

Assessment Notice shall not be required in any of the following cases, in
which case, issuance of the formal assessment notice for the payment of the
taxpayer’s deficiency tax liability shall be sufficient:
When the finding for any deficiency tax is the result of mathematical error in
the computation of the tax appearing on the face of the tax return filed by the
taxpayer; or

When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or

When a taxpayer who opted to claim a refund or tax credit of excess

creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or

When the excise tax due on excisable articles has not been paid; or

When an article locally purchased or imported by an exempt person, such as,

but not limited to, vehicles, capital equipment, machineries and spare parts,
has been sold, traded or transferred to non-exempt persons.

15. What is a Notice of Assessment/Formal Letter of Demand?

A Notice of Assessment is a declaration of deficiency taxes issued to a

Taxpayer who fails to respond to a Pre-Assessment Notice within the
prescribed period of time, or whose reply to the PAN was found to be
without merit. The Notice of Assessment shall inform the Taxpayer of this
fact, and that the report of investigation submitted by the Revenue Officer
conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayer’s deficiency
tax or taxes shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based, otherwise, the formal letter
of demand and the notice of assessment shall be void.

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TAXPAYER’S OBLIGATIONS AND PRIVILEGES

16. What is required of a taxpayer who is being audited? A Taxpayer who is

being audited is obliged to:

Duly acknowledge his receipt of the appropriate Letter of Authority upon its
presentation by the Revenue Officer authorized to conduct the audit by
affixing in the Letter of Authority the name of the recipient and the date of
receipt.

Present within a reasonable period of time, his books of accounts and other
related accounting records that may be required by the Revenue Officer; and

Submit the necessary schedules as may be requested by the Revenue Officer

within a reasonable amount of time from his (Taxpayer’s) receipt of the
Letter of Authority.

17. What is the recourse of a Taxpayer who cannot submit the documents
being required of him within the prescribed period of time? If a Taxpayer,
believing that he cannot present his books of accounts and/or other
accounting records, intends to request for more time to present these
documents in order to avoid the issuance of a Jeopardy Assessment, the
Taxpayer may execute what is referred to as a Waiver of the Statute of
Limitations.

18. What is a Waiver of the Statute of Limitations? The Waiver of the Statute
of Limitations is a signed statement whereby the Taxpayer conveys his
agreement to extend the period within which the Bureau may validly issue an
assessment for deficiency taxes. If a Taxpayer opts to execute a Waiver of
the Statute of Limitations, he shall likewise be, in effect, waiving his right to
invoke the defense of prescription for assessments issued after the
reglementary period.

No Waiver of the Statute of Limitations shall be considered valid unless it is

accepted by a duly authorized Bureau official.

19. If a Taxpayer does not agree with the assessment made following an
audit, can he protest this Assessment? Yes, he can. A Taxpayer has the right
to contest an assessment, and may do so by filing a letter of protest stating in
detail his reasons for contesting the assessment.

20. What are the characteristics of a valid protest? A protest is considered

valid if it satisfies the following conditions:

It is made in writing, and addressed to the Commissioner of Internal

Revenue;

It contains the information, and complies with the conditions required by

Sec. 6 of Revenue Regulations No. 12-85; to wit:

a.) Name of the taxpayer and address for the immediate past three (3) taxable
year.

b.) Nature of request whether reinvestigation or reconsideration specifying

newly discovered evidence he intends to present if it is a request for
investigation.

c.) The taxable periods covered.

d.) Assessment number.

e.) Date of receipt of assessment notice or letter of demand.

f.) Itemized statement of the findings to which the taxpayer agrees as a basis
for computing the tax due, which amount should be paid immediately upon
the filing of the protest. For this purpose, the protest shall not be deemed
validly filed unless payment of the agreed portion of the tax is paid first.

g.) The itemized schedule of the adjustments with which the taxpayer does
not agree.

h.) A statement of facts and/or law in support of the protest.

The taxpayer shall state the facts, applicable law, rules and regulations or
jurisprudence on which his protest is based, otherwise, his protest shall be
considered void and without force and effect on the event the letter of protest
submitted by the taxpayer is accepted, the taxpayer shall submit the required
documents in support of his protest within sixty (60) days from date of filing
of his letter of protest, otherwise, the assessment shall become final,
executory and demandable.

It is filed within thirty (30) days from the Taxpayer’s receipt of the Notice of
Assessment and formal Letter of Demand.

21. In the event the Commissioner’s duly authorized representative denies a

Taxpayer’s protest, what alternative course of action is open to the Taxpayer?
If a protest filed by a Taxpayer be denied by the Commissioner’s duly
authorized representative, the Taxpayer may request the Commissioner for a
reconsideration of such denial and that his tax case be referred to the
Bureau’s Appellate Division. The Appellate Division serves as a "Court",
where both parties, i.e. the Revenue Officer on one hand, and the Taxpayer
on the other, can present testimony and evidence before a Hearing Officer, to
support their respective claims.

22. What recourse is open to a Taxpayer if his request for reconsideration is

denied or his protest is not acted?

Should the Taxpayer’s request for reconsideration be denied or his protest is

not acted upon within 180 days from submission of documents by the
Commissioner, the Taxpayer has the right to appeal with the Court of Tax
Appeals (CTA).

Any appeal must be done within thirty (30) days from the date of the
Taxpayer’s receipt of the Commissioner’s decision denying the request for
reconsideration or from the lapse of the 180 day period counted from the
submission of the documents. (Sec. 228 of the Tax Code, as amended).

23. If the Taxpayer is not satisfied with the CTA’s decision, can he appeal
the decision to a higher Court? Yes, he can. Decisions of the Court of Tax
Appeals may be appealed with the Court of Appeals within fifteen (15) days
from the Taxpayer’s receipt of the CTA’s decision. In the event that the
Taxpayer is likewise unsatisfied with the decision of the Court of Appeals, he
may appeal this decision with the Supreme Court.

24. Can a Taxpayer claim a refund or tax credit for erroneously or illegally
collected taxes? Yes, he can. The Taxpayer may file such a claim with the
Commissioner of Internal Revenue (Sec.229, NIRC), within two (2) years
from the payment of the tax or penalty sought to be refunded. Failure of the
Taxpayer to file such a claim within this prescribed period shall result in the
forfeiture of his right to the refund or tax credit.

25. If a Taxpayer has filed a claim for refund and the Bureau has yet to
render a decision on this claim, can the Taxpayer elevate his claim to the
CTA?

Yes, he can, if the two (2) year period stated above is about to end, and the
Commissioner has yet to render a decision on the claim. (Gibbs v. Collector,
L-13453, February 29, 1960).

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REMEDIES OF THE BUREAU IN THE AUDIT PROCESS AND

COLLECTION OF DELINQUENT ACCOUNTS

26. What means are available to the Bureau to compel a Taxpayer to produce
his books of accounts and other records? A Taxpayer shall be requested, in
writing, not more than two (2) times, to produce his books of accounts and
other pertinent accounting records, for inspection. If, after the Taxpayer’s
receipt of the second written request, he still fails to comply with the
requirements of the notice, the Bureau shall then issue him a Subpoena
Duces Tecum.

27. What course of action shall the Bureau take if the Taxpayer fails to
comply with the Subpoena Duces Tecum?

If, after the Taxpayer fails, refuses, or neglects to comply with the
requirements of the Subpoena Duces Tecum, the Bureau may:

File a criminal case against the Taxpayer for violation of Section 5 as it

relates to Sections 14 and 266, of the NIRC, as amended; and/or

Initiate proceedings to cite the Taxpayer for contempt, under Section 3(f),
Rule 71 of the Revised Rules of Court.

28. What alternatives are open to Government for the collection of delinquent
accounts?

Once an assessment becomes final and demandable, the Government may

employ any, or all, of the following remedies for the collection of delinquent
accounts:

Distraint of personal property;

Levy of real property belonging to the Taxpayer;

Civil Action; and

Criminal Action.

29. What is "Distraint of Personal Property"? Distraint of personal property

involves the seizure by the Government of personal property - tangible or
intangible - to enforce the payment of taxes, followed by the public sale of
such property, if the Taxpayer fails to pay the taxes voluntarily.

30. What is "Levy of Real Property"? Levy of real property refers to the same
act of seizure, but in this case of real property, and interest in or rights to
such property in order to enforce the payment of taxes. As in the distraint of
personal property, the real property under levy shall be sold in a public sale,
if the taxes involved are not voluntarily paid following such levy.
31. In what time period must collection be made? Any internal revenue tax,
which has been assessed within the period prescribed shall be collected
within three (3) years from date of assessment. However, tax fraud cases may
be collected by distraint or levy or by a court proceeding within five (5) years
from assessment of the tax or from the last waiver.

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